NZ: May 2001 in Review

For much of May
financial markets appeared to be voting increasingly in
favour of a V-shaped recovery, with equity markets rallying
and bond markets selling off. At the same time, the current
data, if anything, deteriorated. Non-farm payrolls fell by
more than 200,000 over April (later revised up to a fall of
189,000), durable goods orders plunged, the Japanese data
took a turn for the worse and the German Ifo survey was
weaker than expected. All these releases seem to confirm
that the Fed was right to ease 50bp in May and to see the
risks to the outlook as firmly tilted to the
downside.

Yet, despite all this, at the end of the month
the market was not fully pricing in one more 25bp cut by the
Fed, even as equities seemed to be having second thoughts
about the prospects for recovery. It seems that interest
rate markets have become fixated with fears about inflation.
Greenspan and the Fed have been sufficiently concerned by
this to comment specifically on the inflation outlook,
noting that the easing in capacity constraints will mean an
easing in inflation pressures over time. Close watchers of
the Fed have noted, however, that Greenspan's conviction on
this has been toned down a bit. His assessment of inflation
has been amended from "well contained" to "prices seem
likely to be contained". Not much of a shift you might
think, but perhaps enough to justify the market's view that
the Fed is just about done. The last day of the month saw a
rally in US fixed income markets as the Chicago PMI
surprised on the weak side and jobless claims rose again.
Perhaps the markets are coming to the realisation that the
US economy is by no means out of the woods yet? For the bond
market June is starting in a positive fashion.

In FX
markets, most attention was focused on the major currencies.
EUR/USD fell by 4 big figures over May and USD/JPY traded a
5 big figure range. While US data remained soft, markets
retained comfort in the Fed's ability to revive the economy.
Conversely, soft Euroland numbers have hit the EUR, perhaps
because of concerns about the ECB's competency. Changes to
equity index weightings also had an impact on flows. The
largest flows over the month related to EUR selling out of
Japan, resulting in a large decline in EUR/JPY.

KEY NEW
ZEALAND DATA AND EVENTS

The key local event this month was
the RBNZ's decision on 16 May to lower its official cash
rate by a further 25bps to 5.75%. The move had been fully
priced in markets and was expected by most economists. The
RBNZ cited further evidence of weak global economic
conditions - reflected in further downward revisions to
Consensus Forecasts estimates of trading partner growth - as
the key factor underpinning its decision. Although some
economists had called for a larger cut, the RBNZ revealed
that it had only considered a 25bp and no move as possible
options, with robust commodity prices, the weak NZD and
evidence that the domestic economy was gathering momentum as
providing some offset to the negative global news.

Quarterly Employment Survey ?(Q1) - 9 May: Private sector
ordinary time wages rose 1.5% qoq, much higher than the 0.8%
qoq increase expected by the market. As a result, the market
significantly downgraded its view of the likelihood of a
50bp rate cut by the RBNZ on 16 May.

Household Labour Force Survey ?(Q1) - 10
May: Although employment was flat for the quarter, a 2.8%
qoq rise in hours paid and a further fall in the
unemployment rate to a new 13 year low of 5.4% eliminated
any remaining hope of a 50bp rate cut on 16 May.

ANZ Job Ads
(Apr) - 11 May: Jobs ads fell 4.1% mom in April. The outcome
may have been distorted by the Easter holidays - the May
survey will be awaited with interest.

Colmar Brunton
Consumer Confidence (May) - 14 May: Confidence declined to
+11 in April from +22 in March and +38 in February.

RBNZ
Monetary Policy Statement and OCR Review - 16 May: As
expected, the RBNZ reduced its OCR by 25bps to 5.75%. The
tone of the Statement was more dovish than the market had
expected, but more hawkish comments by RBNZ Governor Brash
subsequent provided some balance.

Retail Trade (Q1) - 17
May: Real sales rose 1.4% in Q1, much stronger than the
market's expectation of 0.5% qoq. Nominal sales in the month
of March rose by 0.9% mom, the same as in February.

REINZ
House Sales ?(Apr) - 18 May: The number of house sales rose
15% mom in April to be 24% higher than a year earlier. Along
with the previous day's strong retail sales result, the data
backed up the RBNZ's view that the domestic economy was
stronger than many had credited.

External Migration
(Apr) - 21 May: A small net inflow of migrants was recorded
- the first since November 1999. Tourist arrivals fell 1%
mom but were 7% higher than a year earlier.

House Prices
(Q1) - 21 May: House prices fell 0.1% qoq to be 1.2% lower
than a year earlier.

NZ Government Budget - 24 May: A
weaker outlook for world growth led the Government to
substantially revise down its forecast for the operating
surplus over the next 4 years. Combined with the impact of
increased provisioning for capital spending and debt
restructuring (taking some debt onto the Government's
balance sheet), the outcome was a much higher-than expected
bond tender programme, especially beyond the 2001/02
year.

Building consents (Apr) - 24 May: The number of
dwellings consents rose 6.5% mom to the highest level since
July 2000, providing further evidence of a recovery in the
housing market (albeit from a very weak base).

Overseas
Merchandise Trade ?(Apr) - 25 May: A preliminary surplus of
$391m was reported for the month of April - much better than
the $175m outcome expected by the market. Both stronger than
expected exports and weaker than expected imports
contributed to the outcome.

NBNZ Business Survey (May) - 30 May:
Business confidence declined further from +17 to +4 but
firms' assessment of their own prospects remained robust at
+31 (down from +37). Inflation indicators eased slightly.

Wholesale Trade Survey ?(Q1) - 31 May: A very strong Q1
outcome provided further evidence to suggest that growth in
Q1 had gained momentum compared with the 0.5% qoq recorded
in Q4.

NZ MARKETS

In line with global trends, the
long end of the New Zealand fixed income market continued to
sell-off this month, with the yield on 10Y NZGBs rising from
6.59% to 6.72%. The 10Y NZGB again under-performed its UST
equivalent - the spread widened beyond 130bps for the first
time since August 1998. The curve steepened sharply between
cash and the 3Y NZGB. The 3Y bond rose 36bps in yield over
the month, while the yield on 90-day bank bills fell 3bps
and the implied yield on the June bank bill future fell
16bps. The market is divided over whether a further rate cut
from the RBNZ is to be expected in June/July. After gaining
ground through mid-May, the NZD weakened sharply on the last
day of the month to end little changed from its opening
level. The New Zealand equity market gave back all of its
previous month's gains, with the NZSE40 ending the month
down 89pts at 2028.

POLITICS

The latest Colmar
Brunton poll showed Labour down 2 points to 44% of the vote,
National up 4 to 41%, Alliance down 1 to 2%, ACT stable at
4%, the Greens up 1 to 6% and NZ First down 1 to 1%.

Darren Gibbs, Senior Economist

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